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Figure out your investing risk tolerance

Transcript

00:16:47 TONYA: So we’ve touched on time horizons. I’ve heard that word a few times, but let’s dig into what someone’s time horizon is, and how that applies to their investment strategy.

00:16:59 DAN: Yeah, so your time horizon is really: when do you need the money? Right? If you need the money in three years, your time horizon is three years. If you need it in ten years, it’s in ten years. If you need it in 30 years, in 30 years. And this really comes down to we talked a lot about risk tolerance. I we covered that well on that’s how you feel about risk. How much risk can you take, right? If you need your money-.

00:17:19 EARL: Within this window.

00:17:20 DAN: If you need your money in two years, even if you’re really aggressive, you maybe shouldn’t be that aggressive. If you need it in 30 years, even if you feel conservative, you can probably weather a few more ups and downs like Earl mentioned.

00:17:30 EARL: Yeah. If you’re in your 20s, you can do a whole lot more in terms of risk. But if you’re, just like Dan was saying, in that time capacity, if you’re in your late 50s, early 60s and you wanna retire at 65, that’s not a big window that you have to compress everything into. You’ve got a lot to think about in that window. So this time horizon is really, just like he said, the capacity to get what you want to do inside of that window. And it’s really important that you understand what that is so that you can have an opportunity to make the right types of decisions inside that time horizon.

00:18:12 TONYA: Yeah. When we say, “time horizon”, I can’t help but think about, you know, we’re on this long stretch of road and we’re looking at the sunset, and we’re driving to it in a convertible. And it’s like, how much road do you have until you reach your sunset?

00:18:24 DAN: I agree, but I think sometimes people start thinking about this always with age, right? You’re about to retire, you’re about to—it’s not-.

00:18:31 EARL: I’m not, though.

00:18:32 DAN: Well, it’s not just age though, right? It’s length of time until your goal. So, if you have a kid who’s one year old, and your starting to save for their college, you can take a lot of ups and downs in hopes that their college fund grows.

00:18:45 TONYA: Yeah.

00:18:46 DAN: If your kid is one year away from college, and you’ve got it really aggressively invested and something happens, a pretty awkward conversation to talk to them about having a gap year so your investments can grow again.

00:18:58 TONYA: And so, Dan, I like how you said it applies to a variety of situations. It’s not just about retirement. It's about those financial goals that are important to you. But also as Earl said, sometimes you have to get creative along the way and it’s not just about having those investments. Like, “Okay, what else are we going to do to supplement this time that we might have lost because we did not start early?”

00:19:17 EARL: Right.

00:19:18 DAN: Right. And again, that’s for everything.

00:19:19 EARL: Yeah.

00:19:20 DAN: There’s retirement, there’s kids sending to college down payment. If you’re ten years away, maybe investing. If you’re two years ago, maybe not. So there’s a lot of pieces there. And I think the action item here is: sit down, list out your goals, and then kind of make a little bit of a matrix. How long do I have? How much risk am I comfortable with? And where do those two things intercept?

00:19:41 TONYA: Where do they meet? Yeah. Time horizon is important, and I’m glad that we have a better understanding of how that factors into our investment strategy. Let’s have a look at what we’ve learned.

00:19:49

(Music / Chapter 4 Ends with Key Takeaways slide)

Chapter 4: Time horizons

There are three risk tolerance profiles to know: conservative, moderate and aggressive. The Just the Facts: Investing worksheet is a great resource to help you identify your risk profile.

What is your time horizon?

Your time horizon is the amount of time you have for investing. Do you need your money in 3, 10, or 30 years? Your answer will likely influence whether you want to be conservative, moderate or aggressive with the amount of time you have to save. If you need an option that could maintain your money with little growth in the short term, consider a conservative approach. If you have time on your side and are willing to try to make money with some degree of risk, go with a moderate or aggressive profile instead of a conservative one. Ultimately, the choice is yours.